Richard Posner, an influential law professor at the University of Chicago, believes the United States has entered a depression. The conservative lecturer believes Keynesian-style stimulus would be a better solution to the economics crisis than tax cuts.
Posner acknowledged that "depression" is an ambiguous term, but in the Becker-Posner Blog, a daily commentary he writes with Nobel Laureate Gary Becker, he argued that the current environment fits his own definition: "There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis."
Posner said conservative economists, such as Fed Chairman Ben Bernanke, generally do not like deficit-spending programs that sponsor public works and transfer payments. However, monetary policy has proven inadequate to staving off the recession, he said, which has converted "almost the entire economics profession - virtually overnight - from being Milton Friedman monetarists... to being John Maynard Keynes deficit spenders."
In the current environment, tax cuts won't prove to be a good idea, as extra income will only be used to increase savings, he said. "One of the reasons why the recession has turned into a depression is that Americans have meager savings, most of them in overpriced houses and overpriced stocks, and so they are sensibly reallocating income from consumption to saving."
By contrast, sponsoring infrastructure projects could reduce unemployment, increase worker confidence, and spur a recovery in spending, he said.
"There is a legitimate concern that many of the projects undertaken by the federal government will yield costs in excess of benefits," Posner said. "But the concern is exaggerated, because it ignores the benefits that such projects confer on fighting the depression as distinct from simply improving the nation's transportation system or reducing carbon emissions or buying military equipment to replace what has been lost in the Iraqi and Afghan wars."
Posner said the multiplier effects of a Keynesian plan make it a better option than simply reducing taxes. "The government's expenditure on buying goods and services (a road, a bridge, or whatever) increases output directly, but it also does so indirectly because the company that builds the project with government funds pays its employees and suppliers, and they in turn spend part of the money they receive, further stimulating output," he said.
In addition to being a professor of law, Posner is a judge on the U.S. Court of Appeals for the Seventh Circuit in Chicago.
By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2009